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Plan Sponsors Still Falling Short in Risk Management, Survey Finds

A majority of pension plan executives have failed to act aggressively to mitigate the issues, according to a survey from Hewitt Associates.

December 22, 2008
Related Topics: Finance/Taxes, Retirement/Pensions, Policies and Procedures, Latest News

Pension plan risks pose a “clear and present” danger to corporate sponsors, but a majority of pension plan executives have failed to act aggressively to mitigate them, according to a survey released Friday, December 19, by investment consultant Hewitt Associates.

While a “significant and growing minority of sponsors” have adopted leading-edge risk management practices, a majority of pension plans surveyed “have fallen further behind in the current economic climate,” Hewitt reported.

“Plan sponsors haven’t done enough, soon enough,” said Joe McDonald, a principal with Hewitt and head of the firm’s North American pension risk services group, in an interview.

Progress is being made, but broadly speaking pension overseers have been “slow in pulling the trigger” when it comes to taking steps to manage their risks more effectively, he noted.

For example, about a quarter of respondents globally reported using liability-driven investment strategies in the latest survey, up from 17 percent for Hewitt’s previous survey in 2006. (For U.S. sponsors alone, the corresponding figures were 20 percent, up from 15 percent.)

Meanwhile, 40 percent of respondents said they were seeking greater diversification through alternative strategies, up from 37 percent in 2006. (U.S. respondents reported a stronger take-up, with 46 percent in 2008, up from 34 percent two years before.) And 37 percent of respondents reported boosting bond exposure and reducing equity exposure, up from 28 percent in 2006. (The correspondent U.S. figures were 24 percent, up from 17 percent.)

Despite those advances, the survey showed ample room for further progress both in how plan sponsors gauge pension risk and how they act to mitigate it.

For example, the survey showed that only 18 percent of respondents looking at their “pension risk” in the larger context of the sponsoring company’s overall enterprise risk, while nearly half still looked at that risk in isolation.

And while liability-driven investment strategies are garnering more attention, less than 20 percent of respondents said they benchmark the performance of their pension assets against their liabilities, suggesting little progress from Hewitt’s previous survey in 2006. That points to the need for further progress, because unless plan sponsors are looking at their pension risks in the right context, it will be that much tougher to make effective decisions, McDonald said.

The survey showed greater LDI progress in the U.K. and Europe—where roughly 30 percent of respondents had adopted strategies to address the mismatch between assets and liabilities—than in North America, where just 20 percent of U.S. respondents and 15 percent of Canadian respondents had done so.

Likewise, European respondents reported the broadest move out of equities, with 60 percent reporting reductions, compared with 27 percent of North American respondents.

Asked to identify key pension risk factors, respondents cited interest rate volatility—which determines the present value of future pension obligations—and equity market volatility as top concerns. However, McDonald pointed out that while 70 percent of respondents cited interest rates as a major concern, only 30 percent indicated an intention to try to hedge that risk.

Hewitt flagged currency volatility—especially for companies with global operations—and longer life spans as two risk factors that may be underappreciated or “hidden.”

Mortality assumptions are failing to capture the full extent to which developed-world life spans have been lengthening, although U.K. pension plans appear to be an exception to that rule. According to the Hewitt report, “if anything close to current U.K. mortality projections are reasonable for the developed world, other countries may well have an additional 10 percent to 15 percent of their liability not being disclosed.”

Partly as a result of those relatively conservative projections, U.K. pensions are also leading the way in contemplating buyouts of pension liabilities, with two-thirds of respondents there saying they will consider that option in the coming five to 10 years, Hewitt said. Globally, only 41 percent of respondents said they would consider buyouts.

The survey of 171 companies, from 12 countries, with defined-benefit plans was completed by early September, just as market volatility began to worsen markedly, but Hewitt officials said the conclusions reported on the basis of the survey remain valid. If anything, McDonald said the sledgehammer blows delivered by capital markets since September are likely to bring issues that haven’t gotten sufficient attention until now front and center during the coming months.

Even so, not all of the signals from Hewitt’s latest survey pointed to progress, with fewer respondents saying they were taking a long-term view in managing their pensions than two years before. Passage of legislation such as the U.S. Pension Protection Act, the 2006 bill that is forcing companies to take a fair-value approach to gauging their pension assets, could be one factor contributing to that development, Hewitt said.

Filed by Douglas Appell of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail

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